Most people are unsure what is CIBIL score and as a result, fail to understand why it matters. Today, your CIBIL score is a financial indicator of your creditworthiness. It is the reason why you may quickly obtain additional credit or fail to do so. Here, you can find the details about the crucial factors that could affect your CIBIL score.
The value of a good credit score manifests most when you need to avail a loan or additional credit. Since formal lending is more reliable and familiar today than informal sources of credit, you need to understand that any lender will place their decision to extend credit to you based on your credit score.
A credit score ranges from 300 and 900, and anything above 750 is seen as a good credit score. Thus, if you have a credit score which is more than 750, you will find it easier to obtain additional credit from a formal institution. Failing to meet this requirement may invite outright rejection of your need for credit.
As important as it is to have a good credit score, you need to understand that a good score cannot be built overnight. Many factors impact your credit score, and it takes time to build a good one. Here are some of the most crucial factors which stand to impact your credit score.
Factors Which Affect Your Credit Score
Credit History For Repayment
This is among the topmost essential factors which impact your credit score. Your credit history for repayment is attached with every loan and credit source which you avail and payback money for.
Each time you make a payment of your monthly instalment on time, it gets counted as a positive aspect in your credit report. The opposite of this is also true.
When you fail to make timely repayment of your outstanding credit instalments, it reflects poorly on your CIBIL score. This happens because every lending institution shares information about your credit activity with the rating agency periodically. As a result, missing even a single payment or making it later than due date enters your record.
Credit Utilisation Ratio
A credit utilisation ratio is a relation between the available credit limit on your sources of credit and the expenses made by you using those credit sources. So, if you are using one single credit card and utilising a high credit limit available on it, your credit score bears a negative impact.
Moreover, your credit utilisation ratio also comes to impact the interest rates at which you can obtain additional credit. Basically, a high credit utilisation ratio is indicative that your debt is rising. Plus, it also implies that you are highly dependent on your credit sources to meet such a burden.
The solution to this is asking your bank to increase the credit limit available on your card. Else, you can use multiple sources of credit and apportion your expenses between them to lower the ratio.
Applying For Multiple Loans
Each time when you apply for a new credit card or a loan, the information is recorded by the lending institution, since they would want to check your existing credit score.
Thus, if you are reaching out to multiple banks at the same time to obtain loans, multiple enquiries will be recorded for this purpose. Too many of these affect your credit score badly.
The impression that it sends out to the credit agency is that you are a credit hungry person. It raises a question over your financial standing and your ability to meet the liability arising on account of multiple loans.
Servicing Term For Loans
A long loan term may put you under liability for a longer duration, but it is suitable for your credit score. Servicing your loan over a longer duration, by paying back the due amounts on time, cast a positive image for you as a borrower of credit. This is why settling a loan before the due date is not such a good idea for your credit score.
Ratio Of Unsecured Loans
Presence of high unsecured credit in your overall credit may affect your credit score negatively. Unsecured loans and credit cards should be obtained only if necessary. There should be a balance between the amount of secured and unsecured loans.
The presence of secured loans in your overall credit portfolio may, in fact, take your credit score upwards.
Making Payment Of Only Minimum Due Amount
The minimum amount of payment on a source of credit due during a month is a necessary amount which you must pay to the banks. However, continually opting to pay only the minimum due amount may soon make you fall into a debt trap.
Additionally, this will increase the burden of interest on you and failure to make payments in due time will negatively impact your credit score.
Ignoring Mistakes In Credit Report
Ideally, your CIBIL report will contain a detailed record of all past and present transactions with various banking institutions. However, for one or more reason, an error could creep in and make your report erroneous. As a result, it could impact your credit score negatively or positively.
If there are any discrepancies in your report, you must seek to get it corrected immediately. Also, it is important to remember that one must not take personal loans to pay off credit card debt. Thus, it is vital to approach your lender, who will make the necessary changes and report the same to the credit rating agency.
Closing An Old Credit Account
For many reasons, you may opt to close a credit card, which you have owned for a long time. While you may be doing this to reduce your liability, your credit score will not head north due to this.
Closing a credit card means closing the credit history, which comes with it. This can be significantly damaging to your credit score. The only solution to this is to close a card which is relatively newer.
The above-mentioned reasons are among the most crucial factors which affect the credit score. Thus, it is crucial for you to pay attention to the nature of these factors if you wish to maintain your credit score.